Gold, Bitcoin, and Sound Money

The past couple days I’ve been reading Saifedean Ammous, an Austrian economist and professor at the Lebanese American University. His work on Bitcoin is valuable because he approaches it from a unique angle. He is not a programmer or engineer, but an economist and expert on monetary policy. While many old Keynesians have dismissed Bitcoin, Ammous has the advantage of youth and Austrian instincts.

While reading his post on Bitcoin and Monetary Competition I had some thoughts about the various Bitcoin milestones relative to gold. The numbers I quote on gold and fiat inflation are found in his post above.

1 bitcoin = 1 ounce of gold

Earlier this year, a bunch of stories appeared when one bitcoin matched the price of one ounce of gold. (Examples from Zerohedge and Visual Capitalist.) This happened first on March 2, 2017 at a price of $1240 per bitcoin. It was an exciting, if arbitrary, landmark. Bitcoin cannot be measured in ounces so comparing the two assets by weight is kind of nonsensical.

Market capitalization

A more interesting comparison would be in the total market capitalization of both assets. By this measure, bitcoin still has a long way to go. With a market cap of about $180 billion, all the available bitcoin has a value merely 4% of that of gold. (This excludes jewelry which is roughly half of gold’s above-ground supply.) Now if each Bitcoin was worth $250,000 — the point at which it matches gold — that would be exciting.

But this is still not the most exciting comparison with gold. Such a price target can only be based on wild speculation. It would require bitcoin to rise another 20x in price. Can we know anything with certainty?

Inflation rate

The yearly increase in the gold money supply is very consistent and predictable. It has ranged between 1.25-2.00% per year since at least 1945. Bitcoin’s money supply was wildly inflationary for its first few years, but has now slowed to about 4% per year. That is still double or triple the inflation rate of gold, and comparable to silver. This bitcoin issuance schedule is predictable, with the mining rate cut in half every 4 years. It is currently 12.5 new bitcoin per block, or 1800 per day. The last “halving” took place in 2016, and the next “halving” will take place sometime in 2020. This rule is encoded very deeply into the Bitcoin protocol and probably impossible for anyone change.

So, what’s special about 2023? If Bitcoin survives 5 more years it will — with certainty — reach a new milestone. This will be the year that bitcoin passes gold to become the least inflationary currency in the world.

Then, in 2024, Bitcoin will reach another halving, and issuance will drop to 3.125 bitcoin per block. This amounts to 450 new bitcoin per day and about 164,000 per year. With 20 million bitcoin in existence the inflation rate will then be below 1%.

To put this in context, global reserve currencies like USD, JPY, and EUR have been inflated by about 5% per year (over the period 1984 to 2013). All of that new money goes straight into the hands of government. It is used to finance welfare, wars, and bank bailouts, hurting savers in the process. All new bitcoin and gold go to miners who work hard to earn it, in the process providing a valuable service.

Further reading

If you enjoy this topic, it’s also worth reading another post by Ammous or watching this interview with him. Both links discuss his central thesis, that Bitcoin may evolve into the settlement layer for central banks and other large international payments. Unlike ideas such as the lightning network, this use case would not require further technical development of Bitcoin. This idea will be developed more fully in Ammous’ upcoming (April 2018) book, The Bitcoin Standard. I’m especially excited because my favorite author, Nassim Taleb, wrote the forward to Ammous’ book.

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